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Tue, Sep 12, 2023 11:45 PM

Nigeria's Central Bank Bars Banks from Paying Dividends with Foreign Exchange Gains

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Nigeria's Central Bank Bars Banks from Paying Dividends with Foreign Exchange Gains
Nigeria's central bank has issued a circular barring banks from using one-off foreign exchange gains to pay dividends or meet operating expenses. This move comes after several banks reported robust half-year earnings due to currency devaluation. President Bola Tinubu's reforms have allowed the currency to weaken by over a third, saving billions of dollars but exacerbating the cost of living crisis. The central bank has instructed banks to set aside the foreign currency revaluation gains as a buffer against potential adverse movements in the exchange rate. Despite this restriction, top tier lenders such as GT Bank and Zenith Bank have declared interim dividends, boosting sentiment in the stock market.

Lagos, Sept 12 (Reuters) - Nigeria's central bank has barred lenders from paying dividends with earnings from one-off foreign exchange gains after several banks posted strong half-year earnings helped by a currency devaluation.

The circular issued by the central bank highlights the varying effects of the currency regime changes on Nigerian banks and mandates them to set aside the foreign currency (FCY) revaluation gains as a counter-cyclical buffer. The aim is to cushion any potential adverse movements in the foreign exchange (FX) rate in the future.

President Bola Tinubu's reforms earlier this year led to the lifting of foreign exchange trading restrictions and a deliberate weakening of the national currency by more than a third. These measures were adopted to boost government revenue and revive economic growth in the country. While the reforms have successfully saved billions of dollars, they have also worsened the cost of living crisis.

Banks such as First Bank, FCMB, Fidelity Bank, GT Bank, and Zenith Bank have reported one-off revaluation gains on their half-year earnings. Despite this, the central bank's circular explicitly prohibits the utilization of these foreign exchange revaluation gains for dividend payouts or operating expenses.

GT Bank and Zenith Bank, both prominent lenders in Nigeria, have already declared interim dividends of 0.50 naira each, following strong half-year earnings. However, it remains unclear if these dividends were funded by one-off foreign exchange gains.

The announcement of dividends by these banks has generated positive sentiment in the Nigerian stock market. In fact, the market witnessed a surge last week, pushing the exchange rate to a 20-year high. Banking stocks have experienced a remarkable rise of 61% so far this year.

However, the currency devaluation has caused a significant increase in foreign-currency loans when converted back to the naira on banks' balance sheets. This has led some banks to exceed both their lending limits and open positions on foreign exchange trading.

In response, the central bank has assured it will provide waivers to banks that have breached their lending and open position limits as a result of the currency devaluation.

Source of content: OOO News 2023-09-12 News

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